After ignoring the staggering losses suffered by the Nepal Oil Corporation (NOC) due to bleeding subsidies for over a year, the government finally increases fuel prices.

Caught between an irked creditor demanding payment and the fear of mob fury, Nepal's government finally decided to take the plunge, announcing a much-needed hike in fuel prices from midnight on Wednesday.

After ignoring the staggering losses suffered by the state-owned Nepal Oil Corporation (NOC) due to bleeding subsidies for over a year, the Girija Prasad Koirala government finally increased fuel prices after failing to honour its pledge to hold a critical election in November.

From Thursday, the wholesale price of petrol has gone up by Nepali Rs 6 to cost Rs 73 per litre, diesel is Rs 3 dearer at Rs 55.86 per litre, and kerosene will also cost Rs 3 more at Rs 51 per litre. Cooking gas is to cost Rs 200 more per cylinder at Rs 1,100. However, the price of aviation fuel remains unchanged for now.

The hike will help NOC reduce its monthly losses to Rs 70 million (about $1 million). It was losing Rs 400 million every month.

Though the Koirala government tried to put off the decision till the November election, fearing widespread public opposition, it was compelled to hike fuel prices after the constituent assembly polls were called off indefinitely with the Maoists quitting the government and opposing the polls.

The cash-strapped NOC owes Rs 5 billion to the Indian Oil Corporation (IOC), the sole exporter of petroleum products to Nepal, as well as Rs 6 billion to government organisations, banks and other entities, from whom it has been frantically borrowing each month to pay the IOC.

For years, NOC has been failing to clear IOC dues each month due to the government's policy of selling oil below the global rate, which resulted in whopping losses as well as widespread siphoning of oil near the border areas.

Finally, the IOC began reducing oil supplies in a bid to make the government pay its old dues.

For the last two months, Nepal had been reeling under an acute fuel scarcity with huge queues before petrol pumps.

Earlier, Koirala had asked the Indian government not to cut oil supplies till the election and the IOC had to concede reluctantly.

However, with the postponement of the election, the Indian oil major slashed fuel supplies.

Nepal's fuel policy lies in a shambles. The key commerce, industry and supplies ministry has been headless for nearly two months now after the minister quit in a huff over a dispute in his party.

Announcing the price hike, Purushottam Ojha, secretary at the ministry, said the "unpleasant decision" was taken after consultations with the ruling parties and the Maoists in an effort to improve fuel supplies.

Ojha also appealed to the youth wings of the parties to support the decision.

In the past, student organisations, including the one affiliated to Koirala's Nepali Congress party, were the greatest obstacle to a price rise though the World Bank and International Monetary Fund (IMF) urged the government to take the plunge.

An earlier government that sought to increase prices saw widespread demonstrations by students, forcing two ministers to quit.

Though King Gyanendra wielded absolute power during his 15-month rule, even his government was forced to roll back hiked prices after fierce public opposition.

The state-owned Nepal Television said there was adverse public reaction to the price hike.

One of the most powerful groups in Nepal, the Young Communist League affiliated to the Maoists, said it would react after parleys among its leaders.

Dilip, general secretary of the group, told IANS that more than the subsidy, the losses were incurred due to corruption in the NOC, its incompetence and faulty policies.

The perception is shared by a large section of the public.

The next 48 hours will be crucial as the government awaits reactions from student groups and other pressure lobbies.